Samuelson: Hypocrisy Over Gas Prices

It's one of those delicious moments when Washington's hypocrisy is on full and unembarrassed display. On the one hand, some of America's leading politicians condemn high gasoline prices and contend that they stem from "gouging" by oil companies. On the other, many of the same politicians warn against global warming and implore us to curb our use of fossil fuels that emit carbon dioxide, the main greenhouse gas.

Guess what: These crowd-pleasing proclamations are contradictory. Anyone fearful of global warming should cheer higher gasoline prices, because much higher prices represent precisely the sort of powerful incentive needed to push consumers toward more fuel-efficient vehicles and to persuade the auto industry to produce them in large numbers. Bravo for higher prices!

In late May, gasoline prices hit a national average of $3.22 a gallon, which, after correcting for inflation, is roughly as high as in early 1981, the recent peak. This elicited the usual expressions of outrage. Sen. Charles E. Schumer, Democrat of New York, suggested breaking up big oil companies that he says may be to blame for "the sky-high gas prices." By a vote of 284 to 141, the House passed the Federal Price Gouging Prevention Act, which would make it illegal during an "energy emergency" (to be declared by the president) to sell gasoline at a price that is "unconscionably excessive."

The legislation, said House Speaker Nancy Pelosi, would "punish those who are cheating America's families by artificially inflating the price of gasoline."

It's always fun to blame unpopular occurrences on corporate greed. Schumer's notion, for example, is that the wave of giant oil mergers (among others: BP/ARCO, Exxon/Mobil, Chevron/Texaco) has so concentrated U.S. refinery capacity that companies can constrict supply and create artificial scarcities by refusing to build new refineries. It's a plausible-sounding theory whose major defect is the absence of supporting evidence.

Testifying last week before the congressional Joint Economic Committee (JEC), Michael Salinger, an FTC economist, said that the industry's concentration levels remain "low to moderate." According to JEC figures, ConocoPhillips is the biggest U.S. refiner, with 13 percent of capacity; the six largest have 61 percent of capacity. The oil industry is less concentrated than the auto industry, which is considered intensely competitive. As for the absence of new refineries, that problem preceded the merger wave by many years; the last major U.S. refinery was constructed in 1976. There must be some other explanation (environmental restrictions, past low profitability).

Today's higher gasoline prices mostly reflect supply and demand. HOLIDAY TRAVELERS IGNORING FUEL COSTS, headlined USA Today before the Memorial Day weekend. Gasoline demand is up almost 2 percent from 2006 levels. Meanwhile, gasoline supplies have tightened. More refineries than usual shut this spring for repairs—some outages planned, some not (from accidents or dangerous conditions). In April and May, refineries normally operate well above 90 percent of capacity; in 2007, the operating rate was about 89 percent. Imports also declined for many reasons: higher demand in Europe; refinery problems in Venezuela; more gasoline demand from Nigeria.

It's true that oil companies will reap eye-popping profits from high prices. Still, the logic that steep prices, imposed by the market or by taxes, will encourage energy conservation is irrefutable. At the least, high prices would curb the growth of greenhouse gases and oil imports. Congressional Democrats especially have targeted global warming. "We hold our children's future in our hands," Pelosi said early this year. "As the most adaptable creatures on the planet, it is time for us to adapt."

Energy prices apparently are the huge exception to this moral imperative. It is not necessary to adapt to them. The way that Pelosi and others navigate around this illogic is to assume painless improvements in energy efficiency. Congress will order car companies to make more efficient vehicles. It will mandate more renewable energy. It will impose stricter efficiency standards on appliances. Presto, everything's solved. No voter must suffer any inconvenience or cost.

But if fuel prices aren't high, people won't want to buy fuel-efficient cars, which will be more expensive, smaller or both. People will also drive more—offsetting efficiency gains—because it's cheaper. In 2005, the average car traveled 12,375 miles, up 1,871 miles since 1990. Given expanding populations of people and cars, massive gains in efficiency are needed merely to hold total fuel use constant. All this applies equally to buildings and appliances; higher electricity prices are an essential catalyst.

Americans want to stop global warming. They want to cut oil imports. They want cheaper energy. Who will tell them that they can't have it all? Not our "leaders."